One of the most famous sayings in the stock market is “Sell in May”, so it is no surprise that May is one of weakest months of the year for shares. There are only three months where, since 1970, the market has an average return of below zero – May is one of them (the others are June and September). On average the market falls -0.2% in this month, and the probability of a positive return in the month is below half at 47%.

It’s not immediately obvious why May has been historically weak for the stock market. The month is weak for most stock markets worldwide, so whatever the reason it’s unlikely to be anything UK-specific such as the timing of the UK’s financial year.

For investors the great significance of May is that it is the start of the weaker half of the year (historically the market over November to April greatly out-performs the period May to October). Some short-term investors, therefore, tend to reduce exposure to the stock market from May.

On average in May the market trades fairly flat for the first two weeks of the month, and then prices drift lower in the second half. The final trading day of the month, 30 May, has the distinction of being the weakest day for shares in the whole year.

Sectors & shares

Strong sectors relative to the general market in May tend to be Aerospace & Defense, Electricity and Food Producers; while the weaker sectors are: General Industrials and Life Insurance. At the stock level, companies that have historically been strong in May are: Cranswick, Babcock and 3i Group; while weak stocks have been: Taylor Wimpey, Sainsbury and Stagecoach.

Company announcements

May is the third busiest month for results announcements with 52 FTSE 350 companies releasing their final results.

FTSE 100 v S&P 500

Internationally, May is the weakest month of the year for the FTSE 100 Index relative to the S&P 500 Index; on average the UK index under-performs the US by 1.3 percentage points in May.

Diary

On the economics front, there will be the US Nonfarm payroll report on the 2nd, and the MPC interest rate announcement on the 8th. The MSCI quarterly index review is on the 14th. The 20th will see the 20th anniversary of the flotation of the JP Morgan Indian Investment Trust. And on the 5th and 26th of May you’ll have find something else to do as the LSE will be closed.

Shares that like May

The following table lists the four FTSE 350 shares that have the best returns in May over the last ten years. For example, Cranswick has an average return of 4.6% for the month of May. Each stock has risen in May in at least eight of the past ten years.

Shares that dislike May

The following table lists the five FTSE 350 shares that have the worst returns in May over the last ten years. For example, Taylor Wimpey has an average return of -11.0% for the month of May. All five stocks have fallen in May in at least eight of the past yen years.

An equally-weighted portfolio of the above strong May stocks would have out-performed every year an equally-weighted portfolio of the above weak May stocks by an average of 10.8 percentage points in May for the past ten years.

The following chart plots the average performance of the FTSE 100 Index during June since 1984 (more info on this type of chart).

The chart shows that on average, after an initial strong couple of days, the market tends to steadily drift lower for the rest of the month.

May 2013

The average chart for May was posted a month ago here. The following reproduces that chart and overlays the actual FTSE 100 for May 2013.

In an average May the market trades fairly flat for the first couple of weeks and then sells off from the 11th trading day of the month. This year, the market was unusually strong for the first three weeks and then sold off from the 15th trading day of the month.

As explained in the 2013 edition of the Almanac the LTDs of months used to be stronger than average, but in recent years they have been weak. This is quite different from the first trading days of months which strongly out-perform the average for all days, and where the effect has strengthened in recent years.

Since 1984 the market has on average risen 0.08% on the LTD of May, which makes it 8th in the ranking of month LTDs.

Since 2000, however, it has been the 4th strongest month LTD, with an average return of 0.17% on the day.

The following chart shows the FTSE 100 Index returns for every May LTD since 1984.

Second weakest month of the year

We are heading into the weakest two-month period in the year for the stock market. There are only three months where, since 1970, the market has an average return of below zero – May is one of them (the others are June and September). On average the market falls -0.3% in the month, and the probability of a positive return in the month is below 50%, at 45%.

The accompanying chart plots the percentage performance of the FTSE All Share Index for each May since 1980. For example, last year in 2012 the market fell 7.5% in May. As can be seen on the chart, the market has had a greater propensity to fall rather than rise in recent years.

In an average May the market trades fairly flat for the first two weeks of the month, and then prices drift lower in the second half.

So, generally, market performance in May justifies the saying, “sell in May and go away”. May is the start of the weaker half of the year (historically the market over November to April greatly out-performs the period May to October). Some short-term investors, therefore, tend to reduce exposure to the stock market from May.

Internationally, May is the weakest month of the year for the FTSE 100 Index relative to the S&P 500 Index; on average the UK index under-performs the US by 1.4 percentage points in May.

Sectors and stocks

Strong sectors relative to the general market in May tend to be Gas, Water & Multiutilities, Food Producers, Tobacco, and Electricity; while the weaker sectors are: General Industrials and Life Insurance.

At the stock level, an interesting company this month is AVEVA, which is the only stock in the FTSE 350 Index that has risen in nine of the past ten years in May. Conversely, the worst performing stocks in the month have been Old Mutual, Workspace Group, and Barclays, all of which have fallen in nine of the past ten years in May.

Diary

On the economic front, the MPC will make its interest rate announcement at 12 noon on 9 May. Any changes to the MSCI Index will be announced on 15 May in its semi-annual review (such reviews can have an interesting effect on stocks). And be aware the London Stock Exchange will be closed 6 and 27 May.

Finally, for those of an astrological bent, there will be an annular solar eclipse on 10 May and a penumbral lunar eclipse on 25 May. Of course, there can be no rational connection between the lunar calendar and the stock market, but research on recent data shows that the market does tend to be strong on days with a full moon!

Shares that like May

The following table lists the five FTSE 350 shares that have the best historic returns in May over the last ten years. For example, AVEVA has an average return of 10.3% for the month of May. Each stock has risen in at least eight of the past ten years in May – AVEVA is the only stock in the FTSE 350 that has risen in nine of the past ten years.

A portfolio of these five stocks would have out-performed the FTSE 350 Index in every May over the last ten years with an average out-performance of 6.2 percentage points each May.

Shares that dislike May

The following table lists the five FTSE 350 shares that have the worst historic returns in May over the last ten years. For example, Taylor Wimpey has an average return of -10.8% for the month of May. Each stock has fallen in at least eight of the past ten years in May.